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As a small company based in the UK, you may want to look at different ways to raise your business’ early-stage capital. This can be difficult for smaller companies, as investors might be more hesitant to invest in a startup. However, the UK government’s Venture Capital Trust (VCT) incentivises investment in young companies by providing certain tax benefits to investors. For this reason, a VCT is becoming a more viable option for startups to raise capital. This article will explain some key features of the VCT and some eligibility criteria your business must meet to benefit from a VCT scheme.
What is the VCT?
The VCT is an investment scheme in the United Kingdom which offers tax relief for investments in smaller companies. These funds offer investors a tax-efficient means to access venture capital funding. This allows you to reinvest funds in startup businesses. Ultimately, fund managers who use VCT shares can mitigate against the higher risk involved when investing in smaller companies.
How Does a Venture Capital Trust Work?
A VCT will be listed on a stock exchange as a public company, allowing individual investors to invest. Once they do this, they will begin investing in smaller companies that are not on the stock exchange.
VCT investors can also use the tax-free dividends VCTs pay to generate additional income. This means that a VCT investment will allow an investor to claim up to 30% upfront income tax relief or up to £200,000 yearly. To qualify for tax relief, a VCT has certain rules on what it can invest in. For example, a VCT cannot invest in a company with more than 250 employees.
Consequently, investment companies operating with a VCT can incentivise investments from all types of investors, from experienced to individual investors.
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Different Types of Venture Capital Trusts
There are several types of VCTs, including generalist VCTs and Alternative Investment Market VCTs.
Generalist VCTs
A generalist VCT is a trust that will typically invest in unquoted or unlisted companies in various industries.
These generalist VCT funds will vary in the types of companies they invest in. Consequently, you can look for funding from a generalist VCT if you are at an early stage in your business’ growth. When a generalist VCT invests in a business, it will usually use a combination of loan notes and preference shares in the target company.
Alternative Investment Market VCTs
An Alternative Investment Market (AIM) VCT will target its investments in companies on the AIM. The AIM is the equivalent of the London Stock Exchange but for smaller growth companies. These types of VCTs will look at making their investment through acquiring ordinary shares rather than looking for preference shares or using loan notes.
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What Should My Business Look For?
If your business is looking for an investment from a VCT, it is important to know how a VCT will make its investment.
An AIM VCT may ask you for ordinary shares in your company. These investors will also be unlikely to ask for a board seat as part of their investment. This can give you greater control over your business as you grow and expand your operations.
On the other hand, a generalist VCT may ask you for preference shares and a board seat in your company. If an investor takes on a board seat, this can bring expertise and experience to your company’s decision-making process. Equally, it can dilute your equity in the company while adding a board member who may not agree with a change in your business strategy.
In any case, assessing all your options is necessary if you are dealing with a VCT. Remember that you can always negotiate the terms of an investment instead of taking what an investor offers you at face value.
Key Takeaways
As an early-stage company, you probably want to raise capital to expand your operations. One way to get funding is to look at the Venture Capital Trust (VCT) fund. A VCT incentivises investors to provide funds to startup businesses with growth potential in return for certain tax benefits. If a VCT funds your company, it is a good idea to ensure that you are familiar with how the investor will invest in your business. At this stage, it is often a good idea to seek professional commercial legal advice to get the best deal possible for your business.
If you have any questions about a VCT, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A Venture Capital Trust is a government-backed tax-efficient venture capital investment scheme, which will typically target smaller companies with high growth potential.
AIM is similar to the London Stock Exchange since it lists companies. However, the AIM lists smaller companies than those found on the London Stock Exchange.
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